The respondent used $300,000 of equity in his law firm to purchase a house and then refinanced his law firm equity with borrowed money.
He deducted the interest on the borrowed money under s. 20(1)(c)(i) of the Income Tax Act.
The Minister of National Revenue reassessed and denied the deduction, arguing the true economic purpose of the borrowing was to buy a house.
The Supreme Court of Canada held that the legal relationships must be respected and the direct use of the borrowed funds was to refinance the respondent's capital account.
As this is an eligible use, the interest payments were deductible.